Lockheed Martin 2015 Annual Report Download - page 63

Purchase obligations in the preceding table for capital expenditures generally include facilities infrastructure, equipment
and information technology.
We also may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to
obtaining orders for our products and services from certain customers in foreign countries. These agreements are designed to
enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the
country. Offset agreements may be satisfied through activities that do not require us to use cash, including transferring
technology, providing manufacturing and other consulting support to in-country projects and the purchase by third parties
(e.g.,our vendors) of supplies from in-country vendors. These agreements also may be satisfied through our use of cash for
such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects,
establishment of ventures with local companies and building or leasing facilities for in-country operations. We typically do
not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied
against our offset agreements are based on negotiations with the customer and typically require cash outlays that represent
only a fraction of the original amount in the offset agreement. The costs to satisfy our offset obligations are included in the
estimates of our total costs to complete the contract and may impact our profitability and cash flows. The ability to recover
investments that we make is generally dependent upon the successful operation of ventures that we do not control and may
involve products and services that are dissimilar to our business activities. At December 31, 2015, the remaining obligations
under our outstanding offset agreements totaled $16 billion, which primarily relate to our Aeronautics, MFC and MST
business segments, most of which extend through 2028. To the extent we have entered into purchase obligations at
December 31, 2015 that also satisfy offset agreements, those amounts are included in the preceding table. Offset programs
usually extend over several years and may provide for penalties, estimated at approximately $1.4 billion at December 31,
2015, in the event we fail to perform in accordance with offset requirements. While historically we have not been required to
pay material penalties, resolution of offset requirements are often the result of negotiations and subjective judgments.
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide
ULA an additional capital contribution if ULA is unable to make required payments under its inventory supply agreement
with Boeing. As of December 31, 2015, ULA’s total remaining obligation to Boeing under the inventory supply agreement
was $120 million. The parties have agreed to defer the remaining payment obligation as it is more than offset by other
commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this
agreement.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance
and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its
obligations, as it has done through December 31, 2015, and that it will not be necessary to make payments under the cross-
indemnities or guarantees.
We have entered into standby letters of credit, surety bonds and third-party guarantees with financial institutions and
other third parties primarily relating to advances received from customers and the guarantee of future performance on certain
contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some
cases, we may guarantee the contractual performance of third parties such as venture partners. At December 31, 2015, we
had the following outstanding letters of credit, surety bonds and third-party guarantees (in millions):
Commitment Expiration By Period
Total
Commitment
Less Than
1 Year
Years
2 and 3
Years
4 and 5
After
5 Years
Standby letters of credit (a) $2,718 $1,374 $408 $811 $125
Surety bonds 425 420 2 3 —
Guarantees 678 21 14 130 513
Total commitments $3,821 $1,815 $424 $944 $638
(a) Approximately $1.1 billion of standby letters of credit in the “Less Than 1 Year” category, $93 million in the “Years 2 and 3”
category and $724 million in the “Years 4 and 5” category are expected to renew for additional periods until completion of the
contractual obligation.
At December 31, 2015, third-party guarantees totaled $678 million, of which approximately 79% related to guarantees
of contractual performance of ventures to which we currently are or previously were a party. This amount represents our
estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture partners. In
addition, we generally have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a
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